New Models of Compensation or Pay4Performance
This is our last broadcast of the week on people. We have been developing “What Makes People People” and today it is in the context of compensation, specifically paying for performance.
Some Context Here is your primer on People and Money. Salary is a recruiting tool, benefits are a retention tool, and if you want performance - pay for it.
Let that sink in. How many times have you been unhappy with an employee that works at the same level after getting a pay raise? A salary increase has a momentary positive impact (a week or two depending on your pay period) and then is taken for granted. As for benefits, its impact is to create golden handcuffs making it difficult to leave. Neither of these have any real impact on performance.
After 3 decades of consulting to large firms and turning around smaller companies - here is my fundamental lesson on compensation - treat everybody like sales. I pay salespeople for closed deals what if I did the same thing for everybody else - paid them for doing the right thing?
My three lessons about compensation and performance:
The only true measure of business performance is profitability, not revenue. It doesn’t matter how much money flows in; it is all about what is left in the cigar box. If it is true about you as the owner why should it be different with anybody else. Tie all of your compensation to how people impacted the amount of money left in the bank.
Ready for another shock? All compensation systems work! You just don’t like the result. Why is that true? People will do what you pay them to do even achieving unacceptable results because it was designed badly. The chance for mistakes are lowered when pay is based on how people contribute to business success. Get this right and figuring how to reward them is easy.
Get everybody into the game, the great game of business. Most people work in environments where they are forced to bowl with a sheet over the lanes. Imagine the only feedback you receive is noise without knowing how many pins were knocked down or where? And where do you throw the second ball? Why are you the only person losing sleep at night because the company is not performing? Share the load.
Here are three Quick Tips for Tying Compensation to Profits.
The challenge is most small business owners don't understand which customers or products / services are generating the most profit. If this is true for you - start here:
You are still not sure this is the most profitable customer or product / service, but you have attacked the area of the greatest profit potential. Next step is to determine where the greatest contribution to the business can be made by position or step. This is the core of your compensation system:
There are some issues about how to measure I will leave for later Shows. The last issue for creating a Pay4Performance system is linking what they do to what the company needs - giving them a piece of the budget:
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